Sunday, February 8, 2015

Dairy Prices Fall - Why is this good?

January 2015 Class III Milk and Component Prices were announced on February 4. Most all producer prices were down, with butterfat falling the most of the three components making up the Class III milk price. Butter and butterfat have been "overpriced" for most of 2014 and the fall in price to more normal levels was expected. The January NASS price for butter was $1.56/lb., more in line with long-term prices.

Cheese prices were down considerably based on an expectation of lower exports due to the strong USD and International dynamics. During 2014, cheese was above $2.00/lb. until December when the price started falling. January's price was $1.56/lb. Recovery is expected as expressed in the futures market, but with prices staying below $2.00/lb. for the rest of 2015. The NASS price of cheese is the main determinant of the Class III milk price. See details on this relationship in the April 23, 2009 post to this blog.

As mentioned in this post's title, this price drop, while reducing current producer revenue, is the key to the long-term success of the U.S. dairy market. The U.S. free market capitalist system forces producers to continuously review and reduce costs and look for ways to boost revenue. Inefficient producers are weeded out. Improvements in diets, genetics, and management result in continuous competitiveness. This is what makes for a long-term successful dairy market. Many other international dairy producers in other countries do not have to live with this constant pressure for improvement and as a result, do not improve their processes as quickly or as much as U.S. producers do. This pressure for improvement is the key to making a huge industry increasingly efficient, growing, and profitable.

The long-term trends show this month's prices in perspective. Butterfat and milk protein are below the long-term trend lines. In the case of butterfat, this is because of the record-setting highs of 2014, which were not sustainable. In the case of milk protein, the drop is below the long-term established trend indicating that recovery is likely. The big question is "when."

Other Solids pricing, which is based on the price of dry whey, is very stable and consistent with the value that has been established in the last four years.

WHAT'S HAPPENING WITH CHEESE?
Prices go up when inventories are low and down when inventories are too high. Currently, inventories are not too low and they are not too high, as shown in the charts below. The year-end 2014 inventory levels of natural and American cheese were right in line with prior years.

Therefore, the lower prices can only be attributed to an expectation of high inventories caused by reduced exports. The latest export data will be available soon and the information will be posted on this blog. Due to a strengthening of the USD, exports will require lower prices. But, as of year-end 2014, there is no sign of blotted inventories, which would reduce prices.

WHAT IS HAPPENING WITH BUTTER?

High exports in late 2013 caused butter inventories to drop. They have now somewhat recovered and are close to 2013 year-end levels. For that reason, butter prices dropped returning to more traditional levels.

Butter churning did not increase to relieve the low inventories. Inventories recovered only because exports were very significantly reduced. More details on this will be covered in the next post to this blog.

Butter was priced at $1.56/lb. in January, and will likely drop a little more in the coming months as butter settles back to historical prices.

WHAT IS HAPPENING WITH DRY WHEY?

Dry Whey is the basis for "Other Solids" pricing. As more uses of Dry Whey are found, the price has risen from historical values near "0". Dry Whey is primarily an export product and therefore the prices are determined by international events and prices. Unlike other dairy exports, dry whey exports hit a record 58% of production in 2014. This is contributing over $2/lb. to the Class III price.

EXPORTS

A special analysis of 2014 exports will be made in the next post to this blog. Dairy exports are driving dairy prices.